Purpose of the Conceptual Framework

The Conceptual Framework prescribes the concepts for general purpose

financial reporting. Its purpose is to:
a. assist the International Accounting Standards Board (LASB) in
developing Standards* that are based on consistent concepts;
b. assist preparers in developing consistent accounting policies when no
Standard applies to a particular transaction or when a Standard allows a
choice of accounting policy;and
c. assist all parties in understanding and interpreting the Standards.

*In our succeeding discussions, we will use the term Standard(s) to refer to
both the International Financial Reporting Standards (IFRS) and the
Philippine Financial Reporting Standards (PFRS).

The Conceptual Framework provides the foundation for the

development of Standards that:
a. promote transparency by enhancing the international comparability
and quality of financial information.
b. strengthen accountability by reducing the information gap between
providers of capital and the entity's management.
 c. contribute to economic efficiency by helping investors to identify
opportunities and risks around the world, thus improving capital
allocation. The use of a single, trusted accounting language lowers the
cost of capital and reduces international reporting costs.(Conceptual
Framework SP1.5)

Status of the Conceptual Framework

The Conceptual Framework is not a Standard. If there is a conflict between
a Standard and the Conceptual Framework, the requirement of the
Standard will prevail.
The authoritative status of the Conceptual Framework is depicted
in the hierarchy of guidance shown below:

Hierarchy of reporting standards

1. PFRSs
2. Judgment
When making the judgment:
Management shall consider the following:
a. Requirements in other PFRSs dealing with similar
transactions
b. Conceptual Framework
 Management may consider the following:
a. Pronouncements issued by other standard-setting bodies
b. Other accounting literature and industry practices

The hierarchy guidance above means that in the absence of a PFRS

that specifically applies to a transaction, management shall consider the
applicability of the Conceptual Framework in developing and applying an
accounting policy that results in useful information.
To meet the objectives of general purpose financial reporting, a
Standard sometimes contains requirements that depart from the
Conceptual Framework. In such cases, the departure is explained in the
'Basis for Conclusions' on that Standard.
The Conceptual Framework may be revised from time to time
based on the IASB's experience of working with it.However,revisions do not
automatically result to changes in the Standards-
not until after the IASB goes through its due process of amending a
Standard.

Scope of the Conceptual Framework

The Conceptual Framework is concerned with general purpose financial
reporting. General purpose financial reporting involves the preparation
of general purpose financial statements. The Conceptual Framework
provides the concepts that underlie general purpose financial reporting
with regard to the folowing:
1. The objective of financial reporting
2. Qualitative characteristics of useful financial information
3. Financial statements and the reporting entity
4. The elements of financial statements
5. Recognition and derecognition
6. Measurement
7. Presentation and disclosure
8. Concepts of capital and capital maintenance

The Objective of Financial Reporting

"The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to existing
and potential investors, lenders and other creditors in making decisions
about providing resources to the entity."(Conceptual Framework.1.2)
This objective is the foundation of the Conceptual Framework.
All the other aspects of the Conceptual Framework revolve around this
objective.

Primary users
The objective of financial reporting refers to the following, so called the
primary users:
1. Existing and potential investors; and
2. Lenders and other creditors

These users cannot demand information directly from reporting

entities and must rely on general purpose financial reports for much of
their financial information needs.
Accordingly, they are the primary users to whom general purpose
financial reports are directed to.
Lenders refer to those who extend loans (e.g,, banks),while
other creditors refer to those who extend other forms of credit (e.g.,
supplier).
The Conceptual Framework is concerned with general purpose
financial reporting. General purpose financial reporting (or simply
'financial reporting') deals with providing information that caters to the
common needs of the primary users. Therefore,general purpose financial
reports dlo not and cannot provide all the information needs of primary
users. These users will need to consider other sources for their other
information needs (for example, general economic conditions and
expectations, political events and political climate, and industry and
company outlooks).
The information needs of individual primary users may differ
and possibly conflict. Accordingly, financial reporting aims to provide
information that meets the needs of the maximum number of primary
users. Focusing on common needs, however,does not prohibit the
provision of additional information that is most useful to a particular
subset of primary users.
Other users, such as the entity's management, regulators,and
the public, may find general purpose financial reports useful.However,
such reports are not primarily directed to these users.
General purpose financial reports do not directly show the
value of a reporting entity. However, they provide information that
helps users in estimating the value of an entity.
Providing useful information requires making estimates and
judgments. The Conceptual Framework establishes the concepts that
underlie those estimates and judgments.
Decisions about providing resources tothe entity
The primary users' decisions about providing resources to the entity
involve decisions on:
a. buying, selling or holding investments;
b. providing or settling loans and other forms of credit; or
c. exercising voting or similar rights that could influence
management's actions relating to the use of the entity's economic
resources.

These decisions depend on the investor/lender/other creditor's

expected returns (e.g., investment income or repayment of loan).
Expectations about returns, in turn, depend on assessments of the entity's
(i) prospects for future net cash inflows and (ii) management
stewardship. To make these assessments,investors,lenders and other
creditors need information on:
a. the economic resources of the entity, claims against the entity and
changes in those resources and claims; and
b. how efficiently and effectively the entity's management has utilized
the entity's economic resources.
Information on Economic resources, Claims, and Changes General
purpose financial reports provide information on a reporting entity's:

a. Financial position- information on economic resources (assets)and

claims against the reporting entity (liabilities and equity);and

b. Changes in economic resources anad claims - information on

financial performance (income and expenses) and other transactions
and events that lead to changes in financial position.

Collectively, these are referred to under the Conceptual

Framework as the economic phenomena.

Economic resources and Claims

Information about the nature and amounts of an entity's economic
resources (assets) and claims (liabilities and equity) can help users to
identify the entity's financial strengths and weaknesses. That information
can help users in assessing the entity's:
a. Liquidity and solvency;
 b. Needs for additional financing and how successfual it is likely to be
in obtaining that financing; and SAL FI
C.Management's stewardship on the use of economic resources.

Liquidity refers to an entity's ability to pay short-term obligations,

while solvency refers to an entity's ability to meet its long-term
obligations.

All of these contribute to the assessment of the entity's ability to

generate future cash flows.For example:
Information on currently maturing receivables and obligations can
help users assess the timing of future cash flows.
Information about thenature of economic resources can help users
assess whether a resource can produce future cash flows
independently or only in combination with other resources.
Information on liquidity and solvency can help users assess the
entity's ability to obtain additional financing.Overleverage (use of
too much debt) may cause difficulty in obtaining additional
financing.
Information about priorities and payment requirements of claims
 can help users predict how future cash flows will likely to be
distributed among the claims.

Changes in economic resources and claims

Changes in economic resources and claims result from:
a. financial performance (income and expenses);and
b. other events and transactions.

Information on financial performance helps users assess the

entity's ability to produce return from its economic resources.Return
provides an indication on how well management has efficiently and
effectively used the entity's resources.
Information on the variability of the return helps users in
assessing the uncertainty of future cash flows. For example,significant
fluctuations in reported profits may indicate financial instability and
uncertainty on the entity's ability to generate cash flows from its
operations.
Information based on accrual accounting provides a better basis
for assessing an entity's financial performance than information based
solely on cash receipts and payments during the period.

Information on past cash flows helps users assess the entity's

ability to generate future cash flows by providing users a basis in
understanding the entity's operating, investing and financing activities,
assessing its liquidity or solvency,and interpreting other information
about its financial performance.
Economic resources and claims may also change for reasons
aside from financial performnance, such as issuing debt or equity
instruments. Information on these types of changes is necessary for a
complete understanding of the entity's changes in economic resources
and claims and the possible impact of those changes on the entity's
future financial performance.

Information about use of the entity's economic resources Information

on how efficiently and effectively the entity's management has
discharged its responsibilities to use the entity's economic resources
helps users assess the entity's management's stewardship. This
information also helps in predicting how efficiently and effectively the
entity's resources will be used in future periods; thus, helping in the
assessment of the entity's prospects for future net cash inflows.
 Examples of management's responsibilities to use the entity's
economic resources include safeguarding those resources and ensuring
the entity's compliance with laws, regulations and contractual provisions.

Summary:
The decisions of primary users are based on assessments of an entity's
prospects for future net cash inflows and management stewardship.To
make these assessments, users need information on the entity's financial
position, financial performance and other changes in financial position,
and utilization of economic resources.
Qualitative Characteristics
The qualitative characteristics of useful financial information identify
the types of information that are likely to be most useful to the primary
users in making decisions using an entity's financial report. Qualitative
characteristics apply to information in the financial statements as well
as to financial information provided in other ways.
The Conceptual Framework classifies the qualitative
characteristics into the following:

1. Fundamental qualitative characteristics - these are the

 characteristics that make information useful to users. They consist
of the following:
a. Relevance
b. Faithful representation

2. Enhancing qualitative characteristics - these are the

characteristics that enhance the usefulness of information.They
consist of the following:
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

Fundamental qualitative characterstics

Relevance
Information is relevant if it can make a difference in the decisions of
users. Relevant information has the following:
a. Predictive value - the information can help users in making
predictions about future outcomes.
 b. Confirmatory value (feedback value) - the information can help
users in confirming their previous predictions.

Predictive value and confirmatory value are

interrelated.Information that has predictive value is likely to also have
confirmatory value. For example, revenue in the current period
can be used to predict revenue in a future period and at the same time
can also be used in confirming a past prediction.

Materiality
"Information is material if omitting, misstating or obscuring it could
reasonably be expected to influence decisions that the primary users of a
specific reporting entity's general purpose financial statements make on
the basis of those financial statements." (ED/2017/6 Definition of
Material)
The Conceptual Framework states that materiality is an 'entity-
specific' aspect of relevance, meaning materiality depends on the facts
and circumstances surrounding a specific entity.Accordingly, the
Conceptual Framework and the Standards do not specify a uniform
quantitative threshold for materiality.Materiality is a matter ofjudgment.
 IFRS®Practice Statement 2 Making Materiality Judgments
provides a non-mandatory guidance that entities may follow in making
materiality judgments. The guidance consists of a four-step process called
the "materiality process."

Step 1- Identify information that has the potential to be material.

The starting point in making the identification is the

requirements of the Standards. This is because, when developing
Standards, the IASB identifies the information needs of a wide range of
primary users and considers the balance between the benefits to be
derived from the information and the cost of producing it.
However, cost is not a factor when making materiality judgments.
The entity also considers the common information needs of its
primary users, in addition to those specified in the PFRSs.

In making this assessment, the entity considers the following:

a. Whether the information could influence the users' decisions,on
 the basis of the financial statements as a whole.
b. The item's nature or size, or both.
c. Quantitative and qualitative factors.
Quantitative factors include the size of the impact of the item.
The size of an item can be assessed in relation to a percentage
of another amount (e.g,, percentage of total assets or total
revenues) or a threshold amount (e.g.,a capitalization
threshold).
Qualitative factors are characteristics of the item or its
context.These are:
i. Entity-specific qualitative factors, e.g., involvement of a
related party or rarity of the item.
ii. External qualitative factors, e.g, the entity's industry
sector or the state of the economy.

Although there is no hierarchy among materiality factors,an

entity normally first assesses an item on the basis of quantitative
factors. If an item is quantitatively material,the entity need not reassess
it on the basis of qualitative factors.However, if an item is quantitatively
not material, the entity needs to reassess it on the basis of qualitative
factors. For example, an item that has a zero amount (i.e., not
quantitatively material) may nevertheless be considered material in
light of qualitative factors.

Step 3-Organize the information within the draft financial statements in

a way that communicates the information clearly and concisely to
primary users.

The entity exercises judgment on how to present information in

a manner that maximizes understandability to the primary users.
Step 4- Review the draft financial statements to determine whether all material
information has been identified and materiality considered from a wide perspective
and in aggregate,on the basis of the complete set of financial statements.

The revieww allows the entity to 'step-back' and get a wider perspective of
the information provided. This is necessary because an item might not be material
on its own, but it might be material if used in conjunction with the other information
in the complete set of financial statements.
 The four-step Materiality Process
(IFRS®Practice Statement 2)
Faithful representation
Faithful representation means the information provides a true,
correct and complete depiction of the economic phenomena that it
purports to represent.
When an economic phenomenon's substance differs from
its legal form, faithful representation requires the depiction of the
substance (i.e., substance over form). Depicting only the legal form
would not faithfully represent the economic phenomenon.
Faithfully represented information has the following
characteristics:
a. Completeness - all information (in words and numbers)
necessary for users to understand the phenomenon being
depicted is provided. These include description of the nature
of the item, numerical depiction (e.g,, monetary amount),
description of the numerical depiction (e.g., historical cost or
fair value) and explanations of significant facts surrounding
the item.

b. Neutrality-information is selected or presented without bias.

Information is not manipulated to increase the probability that
users will receive it favorably or unfavorably.
Neutrality is supported by prudence, which is the use
of caution when making judgments under conditions of
uncertainty, such that assets or income are not overstated and
liabilities or expenses are not understated. Equally, the
exercise of prudence does not allow the understatement of
assets or overstatement of liabilities because the financial
statements would not be faithfully represented.

c. Free from error-this does not mean that the information is

perfectly accurate in all respects. Free from error means there
are no errors in the description and in the process by which
the information is selected and applied. If the information is
an estimate, that fact should be described clearly, including an
explanation of the process used in making that estimate.
Enhancing qualitative characteristics

Comparability
Information is comparable if it helps users identify similarities and
differences between different sets of information that are provided
by:
a. a single entity but in different periods (intra-comparability);or
b. different entities in a single period (inter-comparability).

Unlike the other qualitative characteristics, comparability

does not relate to only one item because a comparison requires at
least two items.
Comparison is not uniformity, meaning like things must
look alike and different things must look differently. It would be
inappropriate to make different things look alike, or vice versa.
Although related, consistency and comparability are not
the same. Consistency refers to the use of the same methods for
the same items. Comparability is the goal while consistency is the
means of achieving that goal.
Verifiability
Information is verifiable if different users could reach a general
agreement as to what the information purports to represent.
Verification can be direct or indirect. Direct verification
involves direct observation (e.g,, counting of cash). Indirect
verification involves checking the inputs to a model or formula
and recalculating the outputs using the same methodology (e.g.,
checking the debits and credits in the cash ledger and
recalculating the ending balance).

Timeliness
Information is timely if it is available to users in time to be able to
influence their decisions.

Understandability
Information is understandable if it is presented in a clear and
concise manner.
Understandability does not mean that complex matters should
be excluded to make information understandable to users because this
would make information incomplete and potentially
misleading.Accordingly, financial reports are intended for users:
a. who have reasonable knowledge of business activities;and
b. who are willing to analyze the information diligently.

Summary:Qualitative Characteristics
1. Fundamental qualitative characteristics
a. Relevance (predictive value & confirmatory value)
Materiality (entity-specific aspect of relevance)
b. Faithful representation (completeness,neutrality, & free from error)
2. Enhancing qualitative characteristics
a. Comparability
b. Verifiability
C. Timeliness
d. Understandability

Applying the qualitative characteristics

The fundamental qualitative characteristics are essential to the
usefulness of information; meaning, information must be both relevant
and faithfully represented for it to be useful. For example,neither a
relevant information that is erroneous nor a correct information that is
irrelevant helps users make good decisions.
The enhancing qualitative characteristics only enhance the
usefulness of information that is both relevant and faithfully represented
but cannot make information that is irrelevant or erroneous to be useful.
Accordingly, the enhancing qualitative characteristics should be
maximized to the extent possible.There is no prescribed order in
applying the enhancing qualitative characteristics. Sometimes one
enhancing qualitative characteristic may have to be sacrificed to
maximize another.

The Cost Constraint

Cost is a pervasive constraint on the entity's ability to provide useful
financial information.
Providing information entails cost and this can only be justified
by the benefits expected to be derived from using the information.
Accordingly, an optimum balance between costs and benefits is
desirable such that costs do not outweigh the benefits.

Financial statements and the Reporting entity

Objective and scope of financial statements
The objective of general purpose financial statements is to provide
financial information about the reporting entity's assets,
liabilities,equity, income and expenses that is useful in assessing:
a. the entity's prospects for future net cash inflows; and
b. management's stewardship over economic resources.

That information is provided in the:

a. statement of financial position (forrecognized assets,liabilities and
equity;
b. statement(s) of financial performance (for income and expenses);
c. other statements and notes (for additional information on
recognized assets and liabilities, information on unrecognized assets
and liabilities, information on cash flows, information on
contributions from/distributions to owners, and other relevant
information).

Reporting period
Financial statements are prepared for a specified period of time and
provide information on assets, liabilities and equity that existed at the
end of the reporting period, or during the reporting period, and income
and expenses for the reporting period.(Conceptual Framework 3.4)

Comparative information
To help users of financial statements in evaluating changes and trends,
financial statements also provide comparative information for at least
one preceding reporting period. For example, an entity's 2019 current-
year financial statements include the 2018
preceding year-financial statements as comparative information.This
allows users to assess the information's intra-comparability.

Forward-looking information
Financial statements are designed to provide information about past
events (i.e., historical data). Information about possible future
transactions and other events is included in the financial statements
only if it relates to the past information presented in the financial
statements and is deemed useful to users of financial statements.
Financial statements, however, do not typically provide forward-looking
information about management's expectations and strategies for the
reporting entity.
Financial statements include information about events after the
end of the reporting period if it is necessary to meet the objective of
financial statements.

Perspective adopted in financial statements

Information in financial statements is prepared from the perspective of
the reporting entity, not from the perspective of any particular group of
financial statement user.

Going concern assumption

Financial statements are normally prepared on the assumption that the
reporting entity is a going concern, meaning the entity has neither the
intention nor the need to end its operations in the foreseeable future.
If this is not the case, the entity's financial statemnents are
prepared on another basis (e.g, measurement at realizable values rather
than mixture of costs and values).
*Going concern is referred,to as the 'underlying assumption' in the
previous version of the Conceptual Framework.

The reporting entity

A reporting entity is one that is required, or chooses, to prepare financial
statements, and is not necessarily a legal entity. It can be a single entity
or a group or combination of two or more entities.
Sometimes an entity controls another entity. The controlling
entity is called the parent, while the controlled entity is called the
subsidiary. "If a reporting entity comprises both the parent and its
subsidiaries, the reporting entity's financial statements are referred to
as 'consolidated financial statements'.If a reporting entityis the parent
alone, the reporting entity's financial statements are referred to as
'unconsolidated financial statements'."(Conceptual Framework 3.11)
"If a reporting entity comprises two or more entities that are
not all linked by a parent-subsidiary relationship, the reporting entity's
financial statements are referred to as 'combined financial
statements'."(Conceptual Framework 3.12)
For example, Jollibee Foods Corporation controls
Chowking,Greenwich,Mang Inasal, Dunkin' Donuts and many other
companies. Jollibee is the parent, while the controlled companies are
the subsidiaries. The financial statements of Jollibee,including its
subsidiaries, are called consolidated financial statements. The financial
statements of Jollibee alone, excluding its subsidiaries, are called
unconsolidated financial statements.(The financial statements of each
subsidiary alone are referred to as 'individual financial statements.)
If financial statements are prepared to include only Chowking
and Greenwich (two subsidiaries only without the parent), the financial
statements would be referred to as combined financial statements.

Consolidated and unconsolidated financial statements

Consolidated financial statements provide information on a parent and
its subsidiaries viewed as a single reporting entity.Consolidated financial
statements are not designed to provide information on any particular
subsidiary; that information is provided in the subsidiary's owvn
financial statements.
Consolidated information enables users to better assess the
parent's prospects for future cash flows because the parent's cash flows
are affected by the cash flows of its subsidiaries.Accordingly, when
consolidation is required, unconsolidated hO-om0лl
financial statements cannot be used as substitute for consolidated
financial statements. However, a parent may nonetheless be
required or choose to prepare unconsolidated financial statements
in addition to consolidated financial statements.
The Elements of Financial Statements
The elements of financial statements are:
1. Assets
2. Liabilities
3.Equity

4. Income
5. Expenses

Asset
Asset is “a present economic resource controlled by the entity as a
result of past events. An economic resource is a right that has the
potential to produce economic benefits." (Conceptual Framework 4.3
&4.4)

The definition of asset has the following three aspects:

a. Right
b. Potential to produce economic benefits
c. Control
Right
Asset is an economic resource and an economic resource is a right
that has the potential to produce economic benefits.
Rights that have the potential to produce economic
benefits include:
a. Rights that correspond to an obligation of another party:
i. right to receive cash, goods or services.
ii. right to exchange economic resources with another party
on favorable terms.
iii. right to benefit from an obligation of another party to
transfer an economic resource if a specified uncertain
future event occurs.
b. Rights that do not correspond to an obligation of another party:
i. right over physical objects (e.g., right to use a property or
right to sell an inventory).
ii. right to use intellectual property.(Conceptual Framework 4.6)

Rights normally arise from law, contract or similar means.For

example, the right to use a property may arise from owning it or
leasing it. However, rights could also arise from other means,for
example, by creating a know-how (e.g., trade secret) that is not in the
public domain or through a constructive obligation created by another
party.
For goods or services that are received and immediately
consumed (e.g., supplies and employee services), the entity's right to
obtain the related economic benefits exists momentarily until the
entity consumes the goods or services.
Not all rights are assets. To be an asset, the right must have
the potential to produce for the entity economic benefits that are
beyond the benefits available to all other parties and those economic
benefits must be controlled by the entity. For example, a public road
which anybody can access without significant cost and a know-how
that is in the public domain are not assets of the entity.
An entity cannot have a right to obtain economic benefits
from itself. Thus, treasury shares are not an entity's assets.Similarly,
debt and equity instruments issued by a parent and held by its
subsidiary (or vice versa) are not assets (or liabilities) in the
consolidated financial statements.
Theoretically, each right is a separate asset. However, for
accounting purposes, related rights are often treated as a single asset.
For example, ownership of a physical object typically gives rise to
several rights, suchas the right to use the object, the right to sell it, the
right to pledge it, and other similar rights.
The asset is the set of rights and not the physical object.For
example, a lessee (someone who rents a property) may recognize an
asset for its right to use the property (i.e., 'right-of-use asset' or, in
layman's terms, leasehold rights) but not for the
property itself (because the lessee does not legally own the leased
property - the lessor does). Nonetheless, describing the set of rights as
the physical object will often provide a faithful representation of those
rights.
There can be instances where the existence of a right is
uncertain, for example, when the entity's right is disputed by another
party. Until that uncertainty is resolved (for example, by a court ruling).
it is uncertain whether an asset exists.

Potential to produce economic benefits

The asset is the present right that has the potential to produce
economic benefits and not the future economic benefits that the right
may produce. Thus, the right's potential to produce economic benefits
need not be certain, or even likely - what is important is that the right
already exists and that, in at least one circumstance, it would produce
economic benefits for the entity.
Consequently, an asset can exist even if the probability that it
will produce benefits is low, although that low probability affects
decisions on whether the asset is to be recognized,how it is measured,
what information is to be provided about the asset, and how that
information is provided. (Conceptual Framework 4.14. 4.15 & 4.17)
An economic resource can produce economic benefits for an
entity in many ways. For example, the asset may be:
a. Sold,leased,transferred or exchanged for other assets;
b. Used singly or in combination with other assets to produce goods
or provide services;
c. Used to enhance the value of other assets;
d. Used to promote efficiency and cost savings;or
e. Used to settle a liability.

The presence or absence of expenditure is not necessary in

determining the existence of an asset. For example, expenditure on
penalty for violation of law does not result to an asset. On the other
hand, an asset can be obtained for free from donation.Moreover,
acquiring an asset and incurring expenditure do not
necessarily need to coincide. For example, inventory purchased on
account is recognized as asset before the purchase price is paid.
Control
Control means the entity has the exclusive right over the benefits of an
asset and the ability to prevent others from accessing those
benefits.Accordingly, if one party controls an asset, no other party
controls that asset.
Control does not mean that the entity can ensure that the
resource will produce economic benefits in all circumstances. It only
means that if the resource produces benefits, it is the entity who will
obtain those benefits and not another party.
Control links an economic resource to an entity and indicates
the extent to which an entity should account for that economic
resource. For example, an economic resource that an entity does not
control is not an asset of the entity. If an entity controls only a portion
of an economic resource, the entity accounts only that portion and not
the entire resource.
Control normally stems from legally enforceable rights (e.g.,
ownership or legal title). However, ownership is not always necessary
for control to exist because control can arise from other rights. For
example, Entity A acquires a car through bank financing. Although the
bank retains legal title over the car until full payment, the car is
nonetheless an asset of Entity A because Entity A has the exclusive
right to use the car and therefore controls the benefits from it.
Physical possession is also not always necessary for control to
exist. For example, goods transferred by a principal to an agent on
consignment remain as assets of the principal until the goods are sold
to third parties. This is because the principal retains control over the
goods despite the fact that physical possession is transferred to the
agent. Similarly, the agent does not recognize the goods as his assets
because he does not control the economic benefits from the goods-the
principal does.
Liability
Liability is "a present obligation of the entity to transfer an economic
resource as a result of past events." (Conceptual Framework 4.26)
The definition of liability has the following three aspects:
a. Obligation
b. Transfer of an economic resource
c. Present obligation as a result of past events
Obligation
An obligation is "a duty or responsibility that an entity has no
practical ability to avoid." (Conceptual Framework 4.29)

An obligation is either:
a. Legal obligation - an obligation that results from a
contract,legislation, or other operation of law; or
b. Constructive obligation - an obligation that results from an
entity's actions (e.g,, past practice or published policies) that
create a valid expectation on others that the entity will accept
and discharge certain responsibilities.

An obligation is always owed to another party. However,it is

not necessary that the identity of that party is known, for example,
an obligation for environmental damages may be owed to the society
at large.
One party's obligation normally corresponds to another
party's right. For example, a buyer's obligation to pay an accounts
payable of ₱100 normally corresponds to the seller's right to collect
an accounts receivable of ₱100. However, this accounting symmetry
is not maintained at all times because the Standards sometimes
contain different recognition and measurement requirements for the
liability of one party and the corresponding asset of the other party.
For example, direct origination costs result to different
measurements of the lender's loan receivable and the borrower's
loan payable. Similarly, a seller may be
required to recognize a warranty obligation but the buyer would not
recognize a corresponding asset for that warranty.
There can be instances where the existence of an obligation is
uncertain. Until that uncertainty is resolved (for example, by a court
ruling), it is uncertain whether a liability exists.

Transfer of an economic resource

The liability is the obligation that has the potential to require the
transfer of an economic resource to another party and not the future
economic benefits that the obligation may cause to be transferred. Thus,
the obligation's potential to cause a transfer of economic benefits need
not be certain, or even likely, for example,the transfer may be required
only if a specified uncertain future event occurs. What is important is
that the obligation already exists and that, in at least one circumstance,
it would require the entity to transfer an economic resource.
Consequently, a liability can exist even if the probability of a
transfer of an economic resource is low, although that low probability
affects decisions on whether the liability is to be recognized, how it is
measured, what information is to be provided about the liability, and
how that information is provided. (Conceptual Framework 4.37 & 4.38)
An obligation to transfer an economic resource may be an
obligation to:
a. pay cash, deliver goods, or render services;
b. exchange assets with another party on unfavorable terms;
c. transfer assets if a specified uncertain future event occurs;or
d. issue a financial instrument that obliges the entity to transfer an
economic resource.

Present obligation as a result of past events

The obligation must be a present obligation that exists as a result of past
events. A present obligation exists as a result of past events if:
a. the entity has already obtained economic benefits or taken an
action;and
 b. as a consequence, the entity will or may have to transfer an
economic resource that it would not otherwise have had to
transfer.(Conceptual Framework 4.43)

Examples:
Entity A intends to acquire goods in the future.

Analysis:
Entity A has no present obligation. A present obligation arises only
when Entity A:
a. has already purchased and received the goods;and
b. as a consequence, Entity A wll have to pay the purchase price.

Entity B operates a nuclear power plant. In the current year, a new

law was enacted penalizing the improper disposal of toxic waste.No
similar law existed in prior years.

Analysis:
The enactment of legislation is not in itself sufficient to result in an
entity's present obligation, except when the entity:
a. has already taken an action contrary to the provisions of that
law;and
b. as a consequence, the entity will have to pay a penalty.

Accordingly:
Entity B has no present obligation if its existing method of waste
disposal does not violate the new law. Similarly, Entity B has no
present obligation if it can avoid penalty by changing its future
method of waste disposal.
On the other hand, Entity B has a present obligation if its
previous waste disposal has already caused damages, and as a
consequence, Entity B has to pay for those damages.

Entity C enters into an irrevocable commitment with another party to

acquire goods in the future, on credit.
Analysis:
A non-cancellable future commitment gives rise to a present obligation
only when it becomes onerous (i.e., burdensome), for example, if the
goods become obsolete before the delivery but Entity C cannot cancel
the contract withouut paying a substantial penalty.
Unless it becomes burdensome, no present obligation normally
arises from a future commitment.

Although not stated in the sales contract, Entity D has a publicly-

known policy of providing free repair services for the goods it sells.
Entity D has consistently honored this implied policy in the past.

Analysis:
Entity D has a present constructive obligation to provide free repair
services for the goods it has already sold because:
a. Entity D has already taken an action by creating valid
expectations on the customers that it will provide free repair
services;and
b. as a consequence, Entity D will have to provide those free
services.
Analysis:
Entity E has a present obligation because it has already received the
loan proceeds, and as a consequence, has to make the repayment, even
though the bank cannot enforce the repayment until a future date.

Entity F employed Mr.Juan.

Analysis:
Entity F has no present obligation until after Mr. Juan has rendered
services. Before then, the contract is executory-Entity F has a combined
right and obligationto exchange future salary for Mr.Juan's future
services.

Executory contracts
An executory contract "is a contract that is equally unperformed-neither
party has fulfilled any of its obligations, or both parties have partially
fulfilled their obligations to an equal extent."(Conceptual Framework 4.56)
An executory contract establishes a combined right and
obligation to exchange economic resources, which are interdependent
and inseparable. Thus, the two constitute a single asset or liability. The
entity has an asset if the terms of the contract are favorable; a liability if
the terms are unfavourable. However,whether such an asset or liability
is "Equity
includedis inthe
theresidual
financialinterest in thedepends
statements assets on
of the recognition
entity after
criteria and all
deducting theitsselected measurement
liabilities." (Conceptualbasis, including
Framework any assessment
4.63)
of whether the contract is onerous.
The contract ceases to be executory when one party performs
its obligation. If the entity performs first, the entity's combined right and
obligation changes to an asset. If the other party performs first, the
entity's combined right and obligation changes to a liability.
Continuing the previous example:
Entity F neither recognizes an asset nor a liability upon entering the
employment contract with Mr. Juan because,at that point, the
contract is executory.
If Mr. Juan renders services, the contract ceases to be executory,
and Entity F's combined right and obligation changes to a liability -
an obligation to pay Mr. Juan's salary (e.g., salaries payable).
If Entity F pays Mr. Juan's salary in advance, Entity F's combined right
and obligation changes to an asset- a right to receive the services or
a right to be reimbursed if the services are not received (e.g.,
advances to emplovees).
Equity
 The definition of equity applies to aIl entities regardless of form
(i.e., sole proprietorship, partnership, cooperative,corporation, non-
profit entity, or government entity).
Although, equity is defined as a residual, it may be sub-
classified in the statement of financial position. For example, the equity
of a corporation may be sub-classified into share capital,retained
earnings, reserves and other components of equity.Reserves may refer
to amounts set aside for the protection of the entity's creditors or
stakeholders from losses. For some entities (e.g, cooperatives), the
creation of reserves is required by law.Transfers to such reserves are
appropriations of retained earnings rather than expenses.

Income
Income is “increases in assets, or decreases in liabilities,that result in
increases in equity, other than those relating to contributions from
holders of equity claims." (Conceptual Framework 4.68)

Expenses
 Expenses are “decreases in assets, or increases in liabilities, that result
in decreases in equity, other than those relating to distributions to
holders of equity claims." (Conceptual Framework 4.69)

The definitions of income and expenses are opposites.

Income Expenses
Increases in assets or Decreases in assets or
Decreases in liabilities Increases in liabilities
Results in increase in equity Results in decrease in equity
Excludes contributions from Excludes distributions to the
the entity's owners entity's owners

Contributions from, and distributions to, the entity's owners are

not income, and expenses, but rather direct adjustments to equity. NOT
FOR SALF!
Although income and expenses are defined in terms of changes
in assets and liabilities, information on income and expenses is just as
important as information on assets and liabilities because financial
statement users need information on both the financial position and
financial performance of an entity.
Recognition and Derecognition

The recognition process

Recognition is the process of including in the statement of financial
position or the statement(s) of financial performance an item that meets
the definition of one of the financial statement elements (i.e., asset,
liability, equity, income or expense). This involves recording the item in
words and in monetary amount and including that amount in the totals
of either of those statements.
"The amount at which an asset, a liability or equity is
recognized in the statement of financial position is referred to as its
'carrying amount'." (Conceptual Framework 5.1)
Recognition links the elements, the statement of financial
position and the statement(s) of financial performance as follows:
 increases both 'salaries
expense'and 'salaries payable'
(liability).

The statements are linked because the recognition of one

element (or a change in its carrying amount) requires the recognition or
derecognition of another element(s).
Examples:
Recognition of income - Recording a sale increases
resulting in an increase in both 'cash'/'receivable' (asset)
asset. and 'sales' (incomne).
Recognition of income Earning an unearned income
resulting in a decrease in decreases'unearned
liability. income'(liability) and increases
income.
Recognition of expense - Accruing unpaid salaries
resultingin an increase in
liability.
Recognition of expense - Payment for supplies expense
resulting in a decrease in increases 'supplies expense' and
assets. decreases'cash'

Sometimes the recognition of income results in the simultaneous

recognition of a related expense. This simultaneous recognition of income
and expense is also called "matching of costs and income" (matching
concept). For example, the sale of goods results in the simultaneous
recognition of 'sales' (income)and 'cost ofsales' (expense).
Recognition criteria
An item is recognized if:
a. it meets the definition of an asset, liability, equity, income or
expense;and
b. recognizing it would provide useful information, i.e., relevant and
faithfully represented information.

Both the criteria above must be met before an item is

recognized.Accordingly, items that meet the definition of a financial
statement element but do not provide useful information are not
recognized, and vice versa.OR SALE!
Providing information, as well as using that
information,entails cost. For example, the reporting entity may incur
costs in appraising its property for measurement purposes; users
spend time and effort in analyzing and interpreting the
information.Thus, an entity should consider the cost constraint (cost-
benefit principle) when making recognition decisions such that the
usefulness of the information justifies its cost. It is not
possible,however, to establish a uniform threshold for determining
an optimum balance between costs and benefits. This would depend
on the item and the facts and circumstances. Accordingly,judgment
is required when deciding whether to recognize an item, and thus
the recognition requirements in the Standards may need to vary.
Even if an item that meets the definition of an asset or
liability is not recognized, information about that item may still need
to be disclosed in the notes. In such cases, the item is referred to as
unrecognized asset or unrecognized liability.
Relevance
The recognition of an item may not provide relevant information
if,for example:
a. it is uncertain whether an asset or liability exists; or
b. an asset or liability exists, but the probability of an inflowor
outflow of economic benefits is low.(Conceptual Framework
5.12)

Existence uncertainty & Low probability of inflows/outflows

Existence uncertainty or low probability of an inflow or outflow of
economic benefits may result in, but does not automatically lead to,
the non-recognition of an asset or liability. Other factors should be
considered.
If one or both of the foregoing factors result to non-
recognition, information about the unrecognized asset or liability
may still need to be provided in the notes (e.g., information about
the existence uncertainty or the possible inflows or outflows).
Despite the presence of one or both of the foregoing factors,
an asset or liability may nonetheless be recognized if this provides
relevant information. For example, the cost of an asset
(liability) arising from an exchange transaction on market terms generally
reflects the probability of an inflow (outflow) of economic benefits. Thus,
the asset (liability) may be recognized because not recognizing it would
result to the recognition of income (expense), which may not faithfully
represent the transaction.

Faithful representation
The recognition of an item is appropriate if it provides both relevant and
faithfully represented information. The level of measurement uncertainty
and other factors (i.e., presentation and disclosure) affect an item's
faithful representation.
 Measurement uncertainty
An asset or liability must be measured for it to be recognized.Often,
measurement requires estimation and thus subject to measurement
uncertainty. The use of reasonable estimates is an essential part of
financial reporting and does not necessarily undermine the usefulness of
information. Even a high level of measurement uncertainty does not
necessarily preclude an estimate from providing useful information if the
estimate is clearly and accurately described and explained.
However, an exceptionally high measurement uncertainty can
affect the faithful representation of an item, such as when the asset or
liability can only be measured using cash-flow based measurement
techniques and, in addition, one or more of the following circumstances
exists:
a. there is an exceptionally wide range of possible outcomes and each
outcome is exceptionally difficult to estimate.
b. the measure is highly sensitive to small changes in estimates of the
probability of different outcomes.
c. the measurement requires exceptionally difficult or exceptionally
subjective allocations of cash flows that do not relate solely to the asset
or liability being measured.
Derecognition
Derecognition is the opposite of recognition. It is the removal of a
previously recognized asset or liability from the entity's statement of
financial position.
Derecognition occurs when the item no longer meet the
definition of an asset or liability, such as when the entity loses control
of all or part of the asset, or no longer has a present obligation for all
or part of the liability.

On derecognition,the entity:
a. derecognizes the assets or liabilities that have expired or have
been consumed, collected, fulfilled or transferred
(i.e.,'transferred component'), and recognizes any resulting
income and expenses.
b. continues to recognize any assets or liabilities retained after the
derecognition (i.e., 'retained component). No income or expense
is normally recognized on the retained component unless there is
a change in its measurement basis. After derecognition, the
retained component becomes a unit of account separate from the
transferred component.
 Unit of account
Unit of account is “the right or the group of rights, the obligation or
the group of obligations, or the group of rights and obligations, to
which recognition criteria and measurement concepts are
applied."(Conceptual Framework 4.48)
A unit of account can be an account title (e.g., Cash or
Accounts receivable), a group of similar assets (e.g., Property,plant
and equipment), or a group of assets and liabilities (e.g.Cash-
generating unit).
A unit ofaccount is selected for an asset or liability when
determining how that asset or liability, and the related income or
expense, will be recognized and measured. For example, 'Cash' is
recognized when it is either on hand or deposited in the bank and is
measured at face amount, while 'Accounts receivable' is
recognized when a sale occurred and is measured at the transaction
price, adjusted for any uncollectable amount.
"If an entity transfers part of an asset or part of a liability,the
unit of account may change at that time, so that the transferred
component and the retained component become separate units of
account."(Conceptual Framework 4.50)
Transfers
Derecognition is not appropriate if the entity retains substantial control
of a transferred asset. In such case, the entity continues to recognize
the transferred asset and recognizes any proceeds received from the
transfer as a liability.
If there is only a partial transfer, the entity derecognizes only
that transferred component and continues to recognize the retained
component.

Commentary on the changes in the Conceptual Framework

ASSET
Previous version New version
Definition Definition
Asset is a resource controlled by Asset is a present economic
the entity as a result of past resource controlled by the entity
events and from which future as a result of past events.
economic benefits are expected to An economic resource is a
flow to the entity. right that has the potential to
produce economic benefits.
 Essential elements Essential elements
a. Control a. Right
b. Potential to produce
b. Past events
economic benefits
c. Future economic benefits
c. Control

Commentary:
The new Conceptual Framework deleted the notion of an
'expected'flow of future economic benefits and clarifies that the asset
is the
'right' and not the ultimate inflow of economic benefits from that
right. Moreover, it stresses that the right is wvhat the entity controls
and not the future economic benefits. Accordingly, an asset can exist
even if its potential to produce economic benefits is not certain or even
likely (although this could affect the asset's recognition and
measurement).

Previous version New version

 Recognition criteria Recognition criteria
a.The itemmeetsthe a. Theitem meets the definition of
definition of a financial a financial statement element;and
statement element;
b.Recognizing it would provide
b. It is probable that any useful information,i.e., relevant
future economic benefit and faithfully represented
associated with the item will information.

flow to or from the entity;and

c. The item has a cost or value
that can be measured with
reliability.

Commentary:
The new Conceptual Framework deleted the notion of a
'probability' threshold and states that an asset can exist even if its
probability to produce economic benefits is low (although this can
affect recognition decisions on the asset's ability to provide useful
information). It further states that what is important is that in at
least one circumstance the economic resource will produce
 economic benefits.
The new Conceptual Framework also deleted the 'reliable
measurement' criterion and states that even a high level of
measurement uncertainty does not necessarily preclude an asset
from being recognized if the estimate is clearly and accurately
described and explained.
The main effect of the changes is a shift of focus to the principle of
providing useful information, rather than on
rules. Accordingly, the non-recognition of an asset does not
necessarily preclude an entity from providling information about that
unrecognized asset in the notes.

Previous version New version

Derecognition (asset) Derecognition (asset)
Not specifically addressed An asset is derecognized when it
has expired or has been
consumed, collected, or
transferred.
LIABILITY
Previous version New version
Definition Definition
Liability is a present obligation of Liability is a present obligation of
the entity arising from past events, the entity to transfer an economic
the settlement of which is resource as a result of past events.
expected to result in an outflow
from the entity of resources
embodying economic benefits.

Essential elements Essential elements

a. Present obligation arising a. Obligation
from past events b. Transfer of an economic
b. Outflow of economic resource
benefits c. Present obligation as a
result of past events

Commentary:
 The notion of an 'expected' flow of future economic benefits is
deleted, similar to the change in the definition of an asset.The new
Conceptual Framework emphasizes that the liability is the 'obligation'
and not the ultimate outflow of economic benefits from that
obligation.
The new Conceptual Frameworkalso introduced the concept of
'no practical ability to avoid' to the definition of an obligation.
Recognition and Derecognition
The changes in the recognition and derecognition of a liability
parallel those for an asset

EOUITY,INCOME & EXPENSES

Commentary:
The new Conceptual Framework retained the definitions of
equity, income and expenses. However, the emphases that
income includes both revenues and gains, and expenses include
both expenses and losses, were deleted. The IASB,however, do
not expect that these deletions would cause any changes in
practice.(Conceptual Framework BC4.96)
 Also,the new Conceptual Framework states that income and
expenses are classified as recognized either in profit or loss or
other comprehensive income.(This will be discussed
momentarily.)
The new Conceptual Framework also removed the explicit
references to the expense recognition principles of 'systematic
and rational allocation' and 'immediate recognition', but not
'matching'. This, however, does not mean that the former two
are no longer relevant as they are still implied in the new
Conceptual Framework (Conceptual Framework, Chapter
5,e.g,5.10)
Other relevant changes: The new Conceptual Framework also
introduced the concepts of 'unit of account' and 'executory
contracts'.

Summary:
The changes align the Conceptual Framework to the IASB's current
thinking in formulating Standards.For example:
Focusing the definition of an asset to a right, rather than a physical
object, parallels the requirement of PFRS 16 Leases on the
recognition of a 'right-of-use asset' by a lessee.
 Focusing on providing useful information when making
recognition decisions, rather than on probability threshold and
reliable measurement, parallels the requirements of PFRS
3Business Combination for goodwill, PFRS 9 Financial Instruments
for certain derivative instruments and PFRS 13 Fair Value
Measurement on the 'hierarchy of fair value measurement.'
Including the concept that income and expenses are recognized
either in profit or loss or other comprehensive income parallels
the requirements of PAS 1 Presentation of Financial Statements
and other relevant standards.
Introducing the concepts of 'unit of account' and 'executory
contracts' aligns the Conceptual Framework to the provisions of
PFRS 9 on the accounting for investment portfolios and PFRS 15
Revenue from Contracts with Customers on the recognition of
'contract asset', 'contract liability' or 'receivable'.
The Conceptual Framework is not a Standard, hence it does
not provide requirements for specific transactions or other events -
these are addressed by the Standards. The Conceptual Framework's
main purpose is to provide the foundation for the development of
globally acceptable Standards.
Measurement
Recognition requires quantifying an item in monetary terms, thus
necessitating the selection of an appropriate measurement basis.
The application of thequalitative characteristics,including the
cost constraint, is likely to result in the selection of different
measurement bases for different assets, liabilities, income and
expenses. Accordingly, the Standards prescribe specific
measurement bases for different types of assets,liabilities, income
and expenses.

Measurement bases
The Conceptual Framework describes the following measurement
bases:
1. Historical cost
2. Current value
a. Fair value
b. Value in use and fulfilment value
c. Current cost
Historical cost
The historical cost of an asset is the consideration paid to acquire the
asset plus transaction costs.
The historical cost of a liability is the consideration received to
incur the liability minus transaction costs.
In cases where it is not possible to identify the cost, such as on
transactions that are not on market terms, the resulting asset or liability
is initially recognized at current value. That value becomes the asset's
(liability's) deemed cost for subsequent measurement at historical cost.
Unlike current value, historical cost does not reflect changes in
value, but is updated overtime to depict the following:
Historical cost of an asset Historical cost of a liability
a. impairment,depreciation a. increase in the
or amortization obligation resulting from
the liability becoming
onerous
b. collections that b. payments or fulfilments
extinguish part or all of the made that extinguish part or
asset all of the liability
 c. discount or premium c. discount or premium
amortization when the asset amortization when the
is measured at amortized liability is measured at
cost amortized cost

Current value
Current value measures reflect changes in values at the measurement
date. Unlike historical cost, current value is not derived from the price of
the transaction or other event that gave rise to the asset or liability.
Current value measurement bases include the following:
a. Fair value
b. Value in use for assets and Fulfilment value for liabilities
c. Current cost
Fair value
Fair value is "the price that would be received to sell an asset,or paid to
transfer a liability, in an orderly transaction between market participants
atthe measurement date." (Conceptual Framework 6.12)
Fair value reflects the perspective of market participants (i.e.,
participants in a market to which the entity has access).Accordingly, it is
not an entity-specific measurement.
 Fair value can be measured directly by observing prices in an
active market or indirectly using measurement techniques, e.g.cash-
flow-based measurement techniques. Fair value is not adjusted for
transaction costs.

Value in use and fulfilment value

Value in use is "the present value of the cash flows, or other economic
benefits, that an entity expects to derive from the use of an asset and
from its ultimate disposal." (Conceptual Framework 6.17)
Fulfilment value is“the present value of the cash, or other
economic resources, that an entity expects to be obliged to transfer as it
fulfils a liability." (Conceptual Framework 6.17)
"Value in use and fulfilment value reflect entity-specific
assumptions rather than assumptions by market participants." (Conceptual
Framework 6.19)
Value in use and fulfilment value are measured indirectly using
cash-flow-based measurement techniques, similar to those used in
measuring fair value but from an entity-specific perspective rather than
from a market-participant perspective.
Value in use and fulfilment value do not include transaction
costs in acquiring an asset or incurring a liability but include transaction
costs expected to be incurred on the ultimate disposal of the asset or
fulfilment of the liability.

Current cost
Current cost of an asset is "the cost of an equivalent asset at the
measurement date, comprising the consideration that would be paid at
the measurement date plus the transaction costs that would be incurred
at that date." (Conceptual Framework 6.21)
Current cost of a liability is "the consideration that would be
received for an equivalent liability atthe measurement date minus the
transaction costs that would be incurred at that date." (Conceptual
Framework 6.21)
Current cost and historical cost are entry values (i.e., they
reflect prices in acquiring an asset or incurring a liability), whereas fair
value, value in use and fulfilment value are exit values (i.e.,they reflect
prices in selling or using an asset or transferring or fulfilling a liability).
Unlike historical cost, however, current cost reflects conditions at the
measurement date.
In some cases, current cost can only be measured indirectly, for
example, by adjusting the current price of a new asset to reflect the
current age and condition of the asset held by the entity.

Considerations when selecting a measurement basis

When selecting a measurement basis, it is important to consider the
following:
a. the nature of information provided by a particular measurement
basis; and
b. the qualitative characteristics, the cost constraint, and other
factors.

Information provided by particular measurement bases

Different measurement bases result in different information to be
provided in the financial statements. For example:
Measuring an asset at historical cost may result in the subsequent
recognition of depreciation or impairment,whereas measuring that
asset at fair value would result in the subsequent recognition of gain
or loss from changes in fair value; measuring an asset at current cost
may result to the recognition of holding gains and losses from price
changes.
Measuring an asset (liability) at historical cost or current cost does
 not result to gain or loss on initial recognition, unless the asset is
impaired (or the liability is onerous), whereas measuring an asset at
fair value or value in use may result to gain or loss on initial
recognition if the market in which the
asset is acquired is different from the market that is the source of the
prices used in measuring the asset's fair value; the initial gain or loss
is the difference between the consideration paid and the fair value of
the asset acquired.
Historical cost and current cost measurements include transaction
costs in acquiring an asset, whereas fair value measurement excludes
transaction costs; value in use measurement considers only the
transaction costs on the asset's disposal.
The computation of gain or loss on the derecognition of an asset
depends on its measurement basis. For example, the gain or loss on
the derecognition of an asset measured at historical cost is
computed as the difference between the net disposal proceeds, if
any, and the asset's historical cost adjusted for depreciation and
impairment, whereas, if the asset is measured at fair value, the gain
 or loss is the difference between the net disposal proceeds, if any,
and the asset's fair value.

The qualitative characteristics and the cost constraint

An entity also considers whether the information provided by a
particular measurement basis is useful. Information is useful if it is
relevant and faithfully represented and, as far as possible,comparable,
verifiable, timely and understandable.

Relevance
The relevance of information is affected by:
a. the characteristics of the asset or liability;and
b. how that asset or liability contributes to future cash flows.

The characteristics of the asset or liability affect the relevance of

the information provided by a measurement basis. For example,an asset
or liability whose value is sensitive to market factors is more
appropriately measured at fair value rather than at historical cost. Fair
value measurement results in reporting the changes in market factors as
they occur, rather than only when the asset or
 liability is derecognized. On the other hand, a financial asset or
financial liability that is held solely for collecting or repaying
contractual cash flows, rather than for trading activities, is more
appropriately measured at amortized cost (historical cost).
How the asset or liability contributes to future cash flows also
affects the relevance of the information provided by a measurement
basis. For example, an asset that is used in combination with other
assets to produce cash flows (e.g.property, plant and equipment) is
likely to be measured at historical cost. On the other hand, an asset
that can be sold independently (e.g., investment in stocks) is likely to
be measured at fair value.

Faithful representation
The level of measurement uncertainty may affect the faithful
representation of information. Measurement uncertainty arises when
a measure cannot be determined directly by observing prices in an
active market and mnust instead be estimated.
"A high level of measurement uncertainty does not
necessarily prevent the use of a measurement basis that provides
relevant information."(Conceptual Framework 6.60)
Thus, in cases where the measurement uncertainty associated
with a particular measurement basis is so high that it cannot provide
sufficiently faithfully represented information, it is appropriate to
consider selecting a different measurement basis that would also
result in relevant information.
"Measurement uncertainty is different from both outcome
uncertainty and existence uncertainty:
a. outcome uncertainty arises when there is uncertainty about the
amount or timing of any inflow or outflow of economic benefits that
will result from an asset or liability.
b. existence uncertainty arises when it is uncertain whether an
asset or a liability exists." (Conceptual Framework 6.61)

Outcome uncertainty or existence uncertainty may sometimes

contribute, but does not necessarily lead, to
measurement uncertainty. For example, there is no measurement
uncertainty if an asset's fair value can be determined directly by
observing prices in an active market, even if it is uncertain how much
cash that asset will ultimately produce and hence there is outcome
uncertainty.
Existence uncertainty may affect decisions on whether an
asset or a liability is to be recognized.

Enhancing qualitative characteristics and the Cost constraint

Comparability
Consistently using same measurement bases for same items,either
from period to period within a single entity (intra-comparability) or
within a single period across different entities (inter-
comparability),makes the financial statements more comparable.
This does not mean, however, that a selected measurement
basis should never be changed. A change is appropriate if it results in
more relevant information1. Because a change in measurement basis
can make financial statements less understandable, explanatory
information should be disclosed to enable users of financial
statements to understand the effect of the change.
Understandability
Generally, the more different measurement bases are used, the more
complex the resulting information become, and hence less
understandable. Using more different measurement bases is
appropriate only if it is necessary to provide useful information.

Verifiability
Using measurement bases that result in measures that can be
independently corroborated either directly (e.g,, by observing prices)
or indirectly (e.g., by checking inputs to a model) enhances
verifiability. If a measure cannot be veriied, explanatory information
should be disclosed to enable users of financial statements to
understand how the measure was determined.In
some cases, it may be more appropriate to indicate the use of a
different measurement basis.
Depending on the facts and circumstances, the use of either
historical cost or current value has its own merits in relation to
verifiability. For example:
In many situations, using historical cost is simpler and generally well
understood, and hence verifiable. However,measuring depreciation,
impairment or onerous liabilities can be subjective, and hence
lessens verifiability.
Fair value is determined from the perspective of market
participants, not from the entity's perspective, and is independent
of when the asset was acquired or the liability was incurred. Thus,
in principle, different entities that have access to the same
markets would come up with essentially the same amount of fair
value for a particular asset or a liability, and hence verifiable. This
could also enhance comparability because, unlike historical cost,
fair value measurement results in the same amount of measure
for identical assets (liabilities) with different acquisition
(incurrence) dates.
Value in use and fulfilment value are costly to implement and
requires subjective assumptions. Accordingly, these may result in
different measures for identical assets or liabilities by different
entities. This reduces verifiability and comparability.Nonetheless,
value in use may provide useful information, for example, when
 determining the recoverable amount of a group of assets, i.e.,
cash-generating unit.
Current cost results in the same amount of measure for identical
assets (liabilities) acquired (incurred) at different dates. This
enhances comparability. However, determining current cost can
be costly, complex, and subjective, thus reducing verifiability and
understandability. Nonetheless,current cost may provide useful
information, for example,when revaluing a property whose fair
value cannot be determined directly by observing prices in an
active market.
Selecting an appropriate measurement basis requires the
consideration of all factors in combination, including the cost constraint
and other factors, rather than only a single factor in isolation.

Factors specific to initial measurement

In transactions on market terms, an asset's (liability's) cost is normally
similar to its fair value on initial recognition. Even so, it is still necessary
to describe the measurement basis used at initial recognition because
this determines whether any income or expense arises on that date. For
example, measuring an asset or liability at cost does not result to any
income or expenses on initial recognition, except when the asset is
impaired or the liability is onerous, or when income or expense arises
from the derecognition of a transferred asset or liability.
Moreover, the initial and subsequent measurement bases
usually parallel each other. For example, if historical cost is to be used
subsequently, that measurement basis is also normally appropriate at
initial recognition.
In transactions not on market terms, measurement at historical
cost may not provide faithfully represented information.Examples of
transactions not on market terms include:
a. transactions in which the transaction price is affected by related
party relationships or by financial distress of one of the parties
b. receipt of donation from another party or a grant from the
government
c. incurrence of a liability that is imposed by law or a penalty for an
act of wrongdoing

In such cases, it may be appropriate to measure the resulting

asset or liability at a 'deemed cost' (e.g., fair value).
More than one measurement basis
Sometimes it may be necessary to use more than one measurement
basis in order to provide useful information.
---

In most cases, the use of different measurement basis is applied

in such a way that:
a. a single measurement basis is used in the statement of financial
position and statement(s) of financial perormance;and

b. additional information is disclosed in the notes for a different

measurement basis.

For example, an investment property may be measured using

the cost model. However, the investment property's fair value is
disclosed in the notes.

In some cases,however, it may be more appropriate to

a. use a current value measurement basis for the asset or liability in
the statement of financial position; and
b. a different measurement basis for the related income and
expenses in the statement of profit or loss.
 In such cases, the related total income or expense may need to
be allocated to both profit or loss and other comprehensive income.
For example, a debt instrument may be measured at fair value
in the statement of financial position. However, the interest income is
measured in relation to the instrument's amortized cost,while the fair
value changes are recognized in other comprehensive income.

Measurement of equity
Total equity is not measured directly. It is simply equal to the difference
between the carrying amounts of recognized assets and recognized
liabilities.
Financial statements are not designed to show an entity's value.
Thus, total equity cannot be expected to be equal to the entity's market
value nor the amount that can be raised from either selling or liquidating
the entity.
Although total equity is not measured drectly,some of its
components can be measured directly (e.g., share
capital).However,because equity is a residual amount, at least one of its
components cannot be measured directly (e.g., retained earnings).
 Equity is generally positive although some of its components
may be negative (e.g,, retained earnings can be negative if the entity
has accumulated losses). In some cases, even total equity can be
negative such as when total liabilities exceed total assets.

Cash-flow-based measurement techniques

A measure that cannot be observed directly needs to be estimated.One
way to make the estimate is by using cash-flow-based measurement
techniques. Such techniques are not measurement bases, but rather
used in applying a measurement basis.Accordingly, when using such a
technique, it is necessary to identify which measurement basis is used
and the extent to which the technique reflects the factors applicable to
that measurement basis.
When making an estimate from a range of possible outcomes,
the single amount that provides the most relevant information is usually
one from within the central part of the range (a central estimate).
However, different central estimates provide different information. For
example:
a. Statistical mean (Expected value or Probability-weighted
 average)-reflects the average amount within the entire range,giving
more weight to the outcomes that are more likely. Expected value is
not intended to predict the ultimate cash inflow (outflow) from an
asset (liability).
a.Statistical median (Maximum amount that is more likely than not
to occur)-is the middle amount within the range and reflects the
probability of an inflow or outflow to be no more than that amount.
b. Statistical mode (Most likely outcome) - reflects the single most
likely ultimate inflow (outflow) from the asset (liability),
which is the amount that occurs the highest number of times within
the range.

Example:
A range of possible outcomes consists of the following:
13,18,13,14,13,16,14,21, and 13.

a. Statistical mean is the average, so we simply add the values then

divide the sum by the number of the values in the range.
(13+18+13+14+13+16+14+21+13)÷9=15
 b. Statistical median is the middle value, so we simply rearrange the
values in numerical order then get the middle value.13, 13, 13, 13, 14,
14, 16, 18, 21. The median is 14.
In case the number of values is an even number, say 10instead
of 9 as in the illustration above, the two middle values are added
and divided by two (e.g., if the number of values is 10, the 5th and
6th values are added and then divided by two to get the median).

c. Statistical mode is the most frequent value. The mode is 13(because

it occurs four times).
Note: The example above is just a simplification and is only intended to
help reinforce your understanding of the concepts discussed. Hence, the
example should not be construed to reflect all the factors needed when
applying a cash-flow-based measurement technique. For example,
expected value is computed by applying probabilities (i.e., percentages)
to the estimated cash flows, as well as a risk adjustment for possible
variations in those estimates, and a consideration of the time value of
money. This is illustrated in Intermediate Accounting.

Presentation and Disclosure

Presentation and disclosure as communication tools Information about
assets, liabilities, equity, income and expenses is communicated through
presentation and disclosure in the financial statements.
Effective communication makes information more useful.Effective
communication requires:l to resnective autha
a. focusing on presentation and disclosure objectives and principles
rather than on rules.
b. classifying information by grouping similar items and separating
dissimilar items.
c. aggregating information in a manner that it is not obscured either
by excessive detail or by excessive summarization.

The cost constraint (cost-benefit principle) is a pervasive

constraint- meaning it affects all aspects of financial reporting.Hence, it
affects decisions about presentation and disclosure.

Presentation and disclosure objectives and principles

Presentation and disclosure objectives are specified in the Standards.
Those requirements strive for a balance between:
a.giving entities the flexibility to provide relevant and faithfully
 represented information;and
b. requiring information that has both intra-comparability
(comparability from period to period within a single entity)and
inter-comparablity (comparability within a single period across
different entities).

Effective communication also requires the consideration of the

following principles:
a. entity-specific information is more useful than standardized
descriptions, also known as 'boilerplate'; and
b. duplication of information is usually unnecessary as it can make
financial statements less understandable.

Classification
Classification refers to the sorting of assets, liabilities, equity,income or
expenses with similar nature, function, and measurement basis for
presentation and disclosure purposes.
Combining dissimilar items can reduce the usefulness of
information.
Classification of assets and liabilities
Classification is applied to an asset's or liability's selected unit of
account. However, it is sometimes necessary to apply classification to
a higher level of aggregation and then sub-classify the components
separately. For example, assets or liabilities are classified as current
and noncurrent and then each component of those classifications are
sub-classified separately.

Offsetting
Offsetting occurs when an asset and a liability with separate units of
account are combined and only the net amount is presented in the
statement of financial position. Offsetting is generally not appropriate
because it combines dissimilar items.
Treating a set of rights and obligations as a single unit of
account is not offsetting.

Classification of equity
Equity claims with differelit characteristics may be classified
separately. For example, a corporation's equity may be classified into
share capital, retained earnings, and other components.
 Similarly, equity components that are subject to legal or
similar requirements may be classified separately, for
example,statutory reserves, appropriated retained earnings, and
unrestricted retained earnings.

Classification of income and expenses

Income and expenses are classified as recognized either in:
a. profit or loss; or
b. other comprehensive income.

Profit or loss is customarily used as the main indicator of an

entity's 'return' or 'earnings', and hence the entity's financial
performance. However, a complete understanding of an entity's
financial performance requires information on all recognized income
and expenses, including those that are recognized in other
comprehensive income, as well as other information included in the
financial statements
The Standards specify whether an income or expense is to be
recognized in profit or loss or in other comprehensive income.Generally,
income and expenses associated with assets and liabilities that are
measured at historical cost are recognized in profit or loss.
The Standards also specify whether an income or expense that
was previously recognized in other comprehensive income is
subsequently reclassified to profit or loss or transferred directly within
equity.

Aggregation
Aggregation is "the adding together of assets, liabilities, equity,income or
expenses that have shared characteristics and are included in the same
classification." (Conceptual Framework 7.20)

Example:
Classifying vs. Aggregation
 All receivables arising from sales All receivables (i.e.,Accounts
receivable, Notes
on account are classified as
receivable,Advances, etc.) are
"Accounts receivable." Accounts aggregated and presented in the
receivable is a unit ofaccount for statement of financial position
under a single line item called
recognition and measurement "Trade and other receivables."
purposes.Offsetting

Aggregation summarizes a large volume of detail, thus making

information more useful. However, balance should be strived for because
excessive aggregation can conceal important detail.
Typically, summarized information is presented in the statement
of financial position and the statement(s) of financial performance while
detailed information is provided in the notes.
Concepts of Capital and Capital maintenance
The Conceptual Framework mentions two concepts of
capital,namely:
a. Financial concept of capital - capital is regarded as the
invested money or invested purchasing power. Capital is
synonymous with equity, net assets, or net worth.
b. Physical concept of capital-capital is regarded as the entity's
productive capacity, e.g., units of output per day.

The choice of an appropriate concept is based on

users'needs. Thus, if users are primarily concerned with the
maintenance of nominal invested capital or purchasing power of
invested capital, the financial concept should be used; whereas, if
their primary concern is the entity's operating capability, the physical
concept should be used. Most entities adopt the financial concept of
capital in preparing their financial statements.
The concept chosen affects the determination of profit. In
this regard, the concepts of capital give rise to the following concepts
of capital maintenance:
a. Financial capital maintenance - Under this concept, profit is
 earned if the net assets at the end of the period exceeds the net
assets at the beginning of the period, after excluding any
distributions to, and contributions from, owners during the period.
Financial capital maintenance can be measured in either nominal
monetary units or units of constant purchasing power.

b. Physical capital maintenance-Under this concept, profit is

earned only if the entity's productive capacity at the end of the
period exceeds the productive capacity at the beginning of the
period, after excluding any distributions to, and contributions
from,owners during the period.

The concept of capital maintenance is essential in distinguishing

between a return on capital and a return of capital.
Only inflows of assets in excess of the amount needed to maintain capital is
regarded as return on capital or profit.
The physical capital maintenance concept requires the use of
current cost. On the contrary, the financial capital maintenance concept
does not require any particular measurement basis.This would depend on
the type of financial capital that the entity seeks to maintain.
The main difference between the two concepts of capital
maintenance is the treatment of the effects of changes in the prices of
assets and liabilities. This is summarized below:
Financial capital Physical capital
Constant purchasing
Nominal cost power
 Profit represents the Profit represents All price changes are
increase in nominal the increase in treated as capital
money capital over the invested purchasing maintenance
power over the
period Increases in the adjustments that are
period.
prices of assets held part of equity and not
over the period,also Only the portion of as profit.
the increase in prices
called holding gains, in excess of the
are,conceptually,profits increase in the
general level of prices
but are recognized as is regarded as
such only when the profit.The remainder
assets are disposed of.

The Conceptual Framework has been designed to apply to a range

of accounting models and concepts of capital and capital maintenance.
Accordingly, the Conceptual Framework does not prescribe a particular
model, except for financial reporting under hyperinflationary economy.
Capital maintenance adjustments
The revaluation or restatement of assets and liabilities results in increases or
decreases in equity. Although these increases or
decreases meet the definition of income or expenses, they are not recognized in
profit or loss under certain concepts of capital maintenance. Accordingly, these
items are included in equity as capital maintenance adjustments or revaluation
reserves.

Story
Manong Magbabalut sells balut. One morning, Manong had P100.Manong used
that amount to buy balut, cook the balut, and sell them.At the end of the
day,Manong had 240.

Question 1: If Manong uses the financial capital maintenance concept (measured

in nominal monetary units) how much profit did Manong earn? Assume Manong
did not eat any of his baluts.

Answer:P140 (P240 net assets, end. -P100 net assets,beg.)

Question 2: What if Manong ate one balut costing @10, how much is the profit?
Answer: P150 (P240 net assets, end. + ₱10 distribution to owner-P100net
assets,beg.)

Question 3: If Manong uses the financial capital maintenance concept (measured

in units of constant purchasing power). How much profit did Manong earn?

Answer: Coming soon! It is too early for us to discuss this. For now, just ask
Manong Magbabalut when you see him.

Summary:
The Conceptual Framework's purpose is to serve as a guide in
developing, understanding, and interpreting the Standards.
The Conceptual Framework is not a Standard. In case of a conflict
between these two, the Standard prevails.
The Conceptual Framnework is concerned with general purpose
financial reporting. General purpose financial reporting involves
the preparation of general purpose financial statements.
The objective of general purpose financial reporting is to provide
information that is useful to primary users in making decisions
about providing resources to the entity. To make those decisions,
primary users need information on the entity's:
a. financial position and financial performance; and
b. management stewardship.
The primary users are (a) existing and potential investors
and(b)lenders and other creditors.
Financial reports do not and cannot provide all the information
needs of the primary users. Only their common needs are catered
by financial reports.
The fundamental qualitative characteristics are (1) Relevance
and(2) Faithful representation.
The enhancing qualitative characteristics are (3) Comparability,(4)
Verifiability, (5) Timeliness and (6) Understandability.
Relevant information has (a) Predictive value and (b)Feedback
value.
Materiality is an entity-specific aspect of relevance. It is a matter of
judgment. The overriding consideration when making materiality
judgment is whether information could reasonably be expected to
influence the decisions of users.This is in keeping with the objective
of financial reporting of providing useful information.
The materiality process involves the following steps:(1)Identify, (2)
Assess, (3) Organize, and (4) Review.
The elements of faithful representation include (a)Completeness,
(b) Neutrality, and (c) Free from error.